Derailed Allergan/Pfizer merger bad news for Irish firms expanding in US

As corporate lawyers in Dublin lament Barack Obama derailing a gravy train of fees from multi-billion-dollar merger deals to move companies from the US to Ireland's low-tax regime, their friends in tax firms are weighing another problem.

Irish and other foreign companies will likely find it harder in future to acquire businesses in the US, according to some tax partners wading through over 300 pages of regulations issued by the Treasury Department in Washington on Monday to clamp down on tax-cutting inversion deals.

"I think everyone's pretty clear that they were designed to scupper a very larger merger,'' said Joe Tynan, head of tax at PricewaterhouseCoopers in Ireland, referring to Pfizer's move today to abandon its $160 billion merger with Dublin-domiciled Allergan. "The collateral damage from the plan is that it's going to make it much more difficult for an Irish or other foreign company to buy a US firm and get the tax benefit of borrowing significant amounts of money to do it.''

Up until now, interest payments on intra-company loans between a foreign headquarters to a US unit to fund acquisitions could be deducted from US tax bills, subject to some restrictions. The growth of Irish public companies such as Kerry, Glanbia and CRH has been fuelled in the past decade by US purchases. The new Treasury rules ban such tax deductions if the loans are not used to fund new investment the US.

More expensive

“It’s going to make it more expensive to buy US companies and may actually reduce the value of potential takeover targets over there,’’ said Tynan.

Still, US subsidiaries of foreign-owned groups will continue to be allowed deduct interest from parent loans for normal expansion, such as buying plant, hiring people or opening new offices.

Others, however, believe that if the new rules are not ultimately watered down, international tax planners - as is their wont -- will find ways amid a myriad of tax regimes globally to get around the limitations. The bigger issue is the that US’s move flies in face of the Organisation for Economic Co-operation and Development’s efforts to harmonise company tax policy across industrialised nations through its so-called Base Erosion and Profit Shifting Project.

"The whole idea of the BEPS process is to have countries around the world moving in tandem so that cross-border trade and economic growth aren't ultimately impacted,'' said Padraig Cronin, tax partner and vice chairman of Deloitte Ireland.